Unfriending Exelon – I take back all of the positive articles I have written about the company

Social media sites like Facebook and LiveJournal have added several new words to our American lexicon; one that I want to explore today is “unfriend”. In the Facebook vocabulary, that is a term that means quietly striking someone off of your computerized list of “friends”. Those are the people that you care enough about to wonder what they are doing and to allow them to know what you and some of your friends are doing, thinking and saying.

There is no notification to the person selected for “unfriending” on Facebook, but several other social media sites allow the person doing the unfriending to send a message. Based on the urban dictionary entry, it also appears that some friend networks make a point out of publicly unfriending someone as a means of getting others to go along.

I have decided that it is time to figuratively “unfriend” Exelon in a public way.

Over the years, I have written several articles about Exelon that have held the company and its executives up as leaders in the nuclear industry. You can find those articles pretty quickly with a search on this blog or on the old Atomic Insights web site. There was a time when the company was stepping forward in a positive way to help move others to action and to share the knowledge its employees have gathered through the safe and effective operation of 17 nuclear fission power plants.

The company still operates their reactors in a safe and effective manner and still has a large number of dedicated employees, but it is now a company that acts more like an entity led by Samuel Insull or Boss Tweed than one led by Corbin McNeill. Of course, that may be because Corbin McNeill left the company more than half a dozen years ago after he lost an internal struggle over the company’s direction to John Rowe.

Unlike McNeill, who learned about nuclear fission energy technology in an up close and personal way (he did not enter the utility industry until after serving as submarine officer in the US Navy for 20 years) Rowe has an accountant’s view of the power source. He apparently sees fission as simply a way to make as much money for himself and his friends as possible. No matter what Gordon Gekko says, greed is not good for America or any other capitalist economy. When one man or one company has a laser focus on doing whatever benefits their narrowly defined bottom line, greed is most definitely a terribly destructive force.

I have been gathering information about Exelon for several months. I am not quite ready to put that all together, but I am ready to start sharing some of what I have learned about the company’s selfish seeking of ever increasing power and wealth, often at the expense of its real owners.

You see, while Gekko’s “greed is good” speech was delivered to a stockholder’s meeting for a paper company that was being poorly run by a bunch of non-owners who were more focused on their own perks than on making the company function properly, Exelon is a company whose major assets are large, emission-free, low-marginal-cost nuclear power plants built under a concept of natural monopolies who had an agreement with the government and the people that they served.

The government protected the company from competition through legal means, while the individuals and corporations that bought the electricity provided by the company agreed, though their elected representatives, to allow the company to set its prices based on a reasonable margin above its costs. In other words, the customers had a real stake in all of the company’s physical assets; they paid the mortgages directly through their rates while the company was supposed to collect a moderate fee to pay back the stockholders for the service of actually building and running the capital equipment in a safe and reliable manner. One more part of the agreement that was very important was the obligation to serve all customers, which sometimes led to some customers, especially in remote areas, getting a pretty significant discount on the actual cost of serving their demand.

The regulated monopoly utility system works as long as no one gets greedy and as long as there is plenty of transparency. Its success depends on building a truly competent work force that knows how to do its job and that gets infused with a spirit of service to the customer. The stockholders in regulated monopoly utility business know they will never get rich quickly, but with regular investments and “drip” (dividend re-investment programs) they can achieve a very comfortable financial position.

I know this system well – my father was a mid level manager at an electric utility company for 35 years. He was one of the best men I have ever known and he was extremely proud of the work that he did. He loved the fact that FPL provided a product that was so important to people that they cheered when access to that product was restored after a hurricane or other natural event had damaged the wires that delivered the product to their home with its normal three to four nines of reliability. (99.9%-99.99%)

In a way, it is good that Dad never saw what people like John Rowe and others have done to the natural monopoly electric power business; it would hurt him to see top level executives in that business who say things like the following:

“We are constantly looking for ways to grow. But we are doing it in a way that’s hard headed and indeed, cold blooded,” (John) Rowe said.” (Emphasis added)
(Source: Medill Reports February 4, 2009 article titled Nuclear leader Exelon pushes for more plants

I know that the electric power business has changed, that it is now supposed to be “competitive”, at least in some locations, but it is hard to buy that notion when you know what I have learned about the decision making and political action history of the company now known as Exelon.

One of the primary indicators that Exelon has moved into a strategy of dangerously selfish behavior, as opposed to normal corporate efforts to make a profit, is the fact that it operates 17 nuclear power plants and claims that it wants to grow, but it actually owns 19 nuclear power plants with two units at the Zion site that are shuttered with no good technical reason. Though I am still willing to be proved wrong, it appears to me that Exelon could, with the investment of something less than $2 billion, add an additional 2200 MWe of baseload power that could operate for something close to 1.76 cents per kilowatt hour for at least another 25-30 years. Taken in isolation, that investment would be a terrific bargain in today’s market. Exelon, however, has apparently determined that it would be better for its corporate well being to quickly spend the $900 million or so that is in the Zion decommissioning funds to destroy the plant.

At the same time the company is actively seeking major financial support from US taxpayers for building new nuclear power plants.

“The demand for energy must be met,” Rowe stated Dec. 4 at the World Affairs Council of Philadelphia, “and it must be met with the least impact upon our climate and the least burden on the U.S. economy.”

In this speech and others made since recently introducing Exelon 2020, which is the company’s plan to reduce, offset or displace 15 million metric tons of greenhouse emissions by 2020, Rowe outlined five elements he believes to be imperative to U.S. energy policy.

Financial support for nuclear power is one of those imperatives.
…

“We see nuclear as very expensive for a new plant,” Rowe told the Bulletin of Atomic Scientists, “but less expensive and far more reliable than wind; much less expensive than solar is today; and probably much less expensive than coal with carbon sequestration.”
…

Exelon needs new plants to further enlarge its franchise.

Despite reporting a 26 percent increase in fourth quarter earnings ended Dec. 31 from the year-earlier period, Exelon predicted no further growth for 2009.

Storozynski agreed that earnings will be flat.

“Exelon has very limited growth potential because all of its plants operate at full potential,” Storozynski said. “They have no ability for growth without building new plants.”
(Source: Nuclear leader Exelon pushes for more plants)

Angie Storozynski, analyst at Macquarie Group Ltd., should take a closer look at Exelon’s annual stockholder report from 2007. In that report, Rowe lays out a multi-faceted strategy for increased stockholder returns even if acquisition targets manage to rebuff efforts and if the government does not step up to assist the company in financing new facilities. Here are some of Rowe’s key words:

“Our plants will become more valuable in a future economy that is constrained both by carbon regulation and capacity limitations.”
…

“Through many challenges, we have protected and significantly increased the value with which you have entrusted us. Some of that value already has been returned to you in share repurchases and dividend increases. We remain confident in our ability to protect and grow that value in the years to come.We have the nation’s best portfolio of generation assets, a strong record of financial discipline, and one of the most talented management teams in the industry.”
…

“Exelon has been a leading industry voice for federal enactment of greenhouse gas regulation since 2002. We continue to actively advocate for a mandatory, economy-wide climate program that will begin to address the problem effectively without imposing an impossible financial burden on our customers or the economy as a whole. Betsy Moler and her Washington team press the issue daily, both individually and in cooperation with the National Commission on Energy Policy, the U.S.Climate Action Partnership and the Clean Air Group. Exelon is well positioned to succeed in a carbon-constrained world by virtue of our world-class nuclear fleet. Yet our advantage poses challenges of its own. The value we derive from carbon regulation will inevitably result from higher electricity prices. (Emphasis added)”

As an innocent shareholder in Exelon, you may not quite understand the text between the lines, but Rowe is describing Exelon’s well-financed, cooperative lobbing investment aimed at imposing a cap and trade system that awards free allowances worth billions of dollars to existing electricity generators based on their production levels.

That system would reward the current company for the regulated monopoly company’s decision to build nuclear plants, even though that effort was paid for by the rate payers in the designated service territories. ComEd’s nuclear plants were relatively expensive for the time at which they were built, so the ratepayers paid higher than average costs. Some of those higher than average costs came because ComEd did not do a competent job of controlling the construction process, but eventually the builders completed the plants and the workers and plant level managers figured out how to operate them effectively.

When “competition” swept the electrical power industry, many accounting/MBA types talked down the value of the nuclear investments and “reluctantly” agreed to accept the stranded assets. They claimed that there was only a limited market and a limited number of companies qualified to operate the facilities. Once again, ratepayers paid higher than average rates in order to pay off the “stranded” costs of buying the low marginal cost generating facilities. I am pretty sure that there were some business executives that knew those plants would be getting more and more valuable as time went on, especially if they could persuade the government to impose a cap and trade system structured to reward existing owners of low emission generation without really doing much to encourage new plant development.

When a company holds assets that were acquired in a less than above board transaction from its customers and uses those assets to generate $700 million in profits during one of the worst quarters in history for the overall US economy, it should be able figure out ways to finance its own growth without sticking its hand out to the already over stretched taxpayers. When it owns assets that it will willingly destroy in order to maintain its profit margins by constraining the supply of a valuable commodity to something slightly less than the demand, its behavior borders that which demands an official investigation by a skilled prosecutor.

Because Exelon apparently does both of the above, it does not deserve my “friendship”.